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Treasury tense as vital bond auction gets underway

THE IRISH treasury is nervously awaiting the results of the most important bond auction of the year, due to take place today.

The National Treasury Management Agency (NTMA) hopes to raise €1.5bn on behalf of the exchequer but analysts warned that a failed auction could have serious implications for the Government and the economy.

The NTMA plans to auction a 4pc bond that matures in 2014 and a 5pc bond maturing in 2020. But the agency is expected to offer a high rate of interest at 10am today in an attempt to lure investors.

Chief economist with Goodbody Stockbrokers, Dermot O'Leary, said the price at which money is borrowed by the Government is of great concern.

"Following the news last week that the State's bill for Anglo Irish Bank will rise yet further, spreads on Irish Government debt rose yet further," he said.

"Ten-year yields, for example, rose by 31 basis points in the past five days -- taking the spread over German bunds to close to 3pc again for the first time since June.

"While the public finances are not far off initial projections, it is clear that the, as yet unknown, cost of recapitalising the banking system is pushing up the cost of Irish Government debt," he added.

Last week, investors began to sell off the bonds of weaker eurozone countries amid concerns.

It's understood that they were particularly put off by the fact that preventing the collapse of Anglo Irish Bank would be higher than previously thought.

The gap or 'spread' between German and Irish bonds, which is the premium demanded by investors for buying Irish rather than German bonds, surged to over 3pc yesterday.

Target

And the cost of insuring Irish bonds hit the highest point since March 2009, when the financial crisis was at its most intense and some market players speculated that Ireland might default on its debts.

The NTMA has already successfully reached 90pc of the proposed €20bn borrowing target for the year. Analysts believe the bond sale is the right path to take and outlined that today's issue is relatively small with support from Irish banks and institutions present.

But there are warnings the cost of the funding could be very high, putting further pressure on Ireland for the next auction.